It’s been about two weeks since the Fed decided to keep its mortgage purchases going strong, an initiative implemented to keep downward pressure on interest rates.
So how meaningful has the decision to keep things unchanged been for mortgage rates?
Well, all else being equal, before the non-taper event took place on September 18th, 30-year fixed mortgage rates were pricing around 4.625% for a conforming loan amount. And the 15-year fixed was pricing around 3.75%.
Once the Fed announced that it wouldn’t be messing with its mortgage purchase program, rates eventually inched down to 4.25% and 3.5%, respectively. They seem to have settled around these levels.
Save $22 Bucks a Month on a 30-Year Loan
For a $100,000 loan amount set at 4.625% on a 30-year fixed mortgage, you’d be looking at a monthly mortgage payment of $514.14. If you could secure a rate of 4.25% instead, that payment falls to $491.94.
That’s a monthly savings of $22.20 for every $100,000 borrowed. It’s not all that significant on a small loan, though on a $400,000 loan the savings are nearly $90.
So there is a chance the decision not to taper may save some borrowers who have DTI ratios near the maximum allowed, enough to turn a denial into an approval.
There’s also the potential for stronger refinance volume, seeing that it will make sense for more borrowers who otherwise would not have benefited.
After all, the interest savings throughout the term on a 30-year loan are nearly $8,000 per $100,000 in loan amount.
Save Even Less with a 15-Year Term
The savings aren’t as great for a shorter-term loan, seeing that less interest is paid over a shorter amortization period.
For a 15-year fixed mortgage, a $100,000 loan at 3.75% would cost $727.22 a month. If the rate were 3.5% instead, the payment drops to $714.88.
So for every $100,000 borrowed, the savings are $12.34. Not very significant, even on a larger loan amount around the conforming loan limit ($417k).
And the tapering shouldn’t really have an impact on jumbo loans because it involves agency mortgage-backed securities, those issued by Fannie and Freddie.
Of course, it would result in about $2,200 less in interest paid over the 15-year term for every $100,000 borrowed.
That’s nearly $9,000 for a loan amount around $400,000, which is nothing to sneeze at, but also nothing extraordinary.
In reality, homeowners who secured rates before the taper news could pay just a little bit extra each month and pay the same amount (or less) in interest.
The Psychological Impact
While the numbers aren’t that great, it is perhaps the psychological impact that matters most.
When mortgage rates finally reversed course after rising for what felt like months, it probably reinvigorated the downtrodden mortgage market.
Sure, the layoffs have already occurred, but for those still working in the industry, it’s a blessing. And for those looking to buy or refinance, it probably feels good to snag a slightly lower rate.
There’s also the “what if” factor…what if the Fed did taper? Where would interest rates be today? Would the 30-year fixed be at 5% instead? Would the housing market have lost all its momentum?
The answers to these questions are unclear, but time will tell because sooner rather than later the Fed will need to curtail mortgage purchases.
And if it’s later, it may be even more brutal for homeowners, assuming asking prices are higher and home loan lending standards are tighter.
But I suppose the mortgage industry needed a win, and lower rates are certainly important for the re-launch of HARP.